Performance Attribution in Portfolio Management

Hard Performance Evaluation Performance Attribution

An investment manager oversees a portfolio consisting of domestic and international equities. Over the last year, the portfolio recorded a return of 12%, while the benchmark, a global equity index, returned 10%. Within the portfolio, the domestic equities returned 15%, and the international equities returned 8%. The investment manager uses performance attribution analysis to evaluate which segments of the portfolio have contributed most to its overall performance.

Which of the following statements correctly describes the impact of asset allocation on the portfolio's return when assessed through performance attribution?

The positive allocation effect indicates the portfolio benefited from having a higher allocation to the better-performing domestic equities.

The negative allocation effect shows that the underperformance of international equities had no significant impact on the overall return.

A positive selection effect implies that the investment manager should consider reallocating more capital to international equities.

Hint

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